The emergence of China as an economic force has created a smorgasbord of business and investment opportunities. And the CBOE Futures Exchange is hoping that the creation of CBOE China Index Futures (CX), which began trading Monday, will help spur its own growth.

It's just the third product traded on the six-month-old exchange. The launch of the China Index Futures comes just one week after trading began in the FTSE/Xinhua China 25 ( FXI - Get Report) fund, which joins Barclay's growing list of exchange traded funds (ETFs).

Both products contain a basket of China-based companies that have either American depositary receipts or New York registered shares traded on the New York Stock Exchange. While there is significant overlap in holdings -- nine of the 16 stocks that comprise the China Futures Index currently are in the FTSE/Xinhua iShares -- they are of very different construction. The CX is an equal dollar-weighted index, while the FXI's top five holdings represent nearly 40% of the fund.

Leverage Your Future

The other main difference is, of course, in the contract specifications. Like most ETFs, the FXI trades like and requires the same 50% margins of a stock and can be traded in a standard equity account. There is no expiration cycle and the trading price should not experience measurable premium or discount to the net asset value for any length of time. This will give the FXI mass appeal to both professionals and individuals who are looking for broad exposure to the Chinese stock market.

By contrast, the CX futures offer tremendous leverage. Currently, just $2,500 in initial margin is required to buy a contract with a notional value currently around $28,000. This equates to a 9% effective margin rate. But the CX does require a separate futures or commodity trading account, something the majority of individual investors do not possess. The futures initially will have a quarterly expiration cycle and will have three active near-term months available to trade. The contract is cash-settled, meaning there is no delivery of underlying shares.

"The main users and target of our marketing will be professional traders and small institutional money managers," acknowledged Patrick Fay, the managing director of the CBOE Futures Exchange. "The futures offer a very cost-effective way to gain exposure to the Chinese market."

Fay notes that most large institutions, such as Goldman Sachs and J.P. Morgan, already have low-cost access to this group. But remember, the efficiency and low cost of futures stems from the low margin described above, and that leverage can cut both ways. In other words, be aware that, like gains, losses also can be several magnitudes greater than the initial investment.

Options Come With That

Another nice aspect of the CX futures is that its options should be available to trade within the next two weeks, according to Fay. Equities typically do not get options until the underlying has traded for at least three months and meets certain volume and price requirements (unless you're Google ( GOOG - Get Report), which had options one week after its IPO).

But the listing of options on futures has no such restrictions or trading thresholds. Of course, it's important to be aware that the options are likely to be thinly traded, especially in the beginning.

"Liquidity on an options market is a direct function of volume and liquidity in the underlying," explained Eric Stern, an independent trader on the CBOE floor.

On the first day they traded, Monday, Oct. 18, CX futures traded 60 contracts. On Tuesday, CX logged volume of 130 contracts. For comparison, in its first week, the FXI has been averaging some 25,000 shares a day.

Fay expects volume to grow as money managers of China-related funds use the index to help track their benchmark. "I've received a lot of calls for correlation data in which fund managers have expressed interest in parking money in the index and maintaining performance instead of putting free cash into a money market fund," he said.

To Stay and to Grow

In what might prove to be a blessing, both of these products were launched well after the incredible run-up and sizable selloff in Chinese stocks, which has taken place over the last 18 months. Back data on the CX Index shows it would have gone from 100 to 360, or seen a 360% increase, during the last 10 months of 2003 as stocks such as Netease ( NTES - Get Report) and ( SOHU - Get Report) soared on speculation. But the index would have risen so high only to tumble 33% to 240 this past summer. While this kind of volatility usually is welcome for active professional traders, a more stable and mature market is probably desirable when launching a new product aimed at attracting long-term users.

With companies in the indices now past the initial euphoria and hypergrowth phase, investors can start to assess their long-term growth prospects and how these products can be intelligently employed.

Steven Smith writes regularly for In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He was a seatholding member of the Chicago Board of Trade (CBOT) and the Chicago Board Options Exchange (CBOE) from May 1989 to August 1995. During that six-year period, he traded multiple markets for his own personal account and acted as an executing broker for third-party accounts. He invites you to send your feedback to